Financial market linkages and the sovereign debt crisis

Working paper

We develop a novel approach to investigate the presence of financial contagion during the European sovereign debt crisis. The novelty lies in modelling bond yield market comovements allowing the individual long-run variances to be time-dependent and the correlations to change smoothly between two extreme states according to time and observable financial variables. The new model has the flexibility to discern between long-run and short-run contagion effects on the basis of the variable used as indicator for the time-variation in correlations. The main results provide evidence of long-run contagion effects across peripheral countries following the more acute phase of the sovereign crisis.

Authors: Campos-Martins, S; Amado, C

• Publication status: Published
• Publisher: University of Oxford
• Article number: 946
• Series: Department of Economics Discussion Paper Series
• Publication date: 2021-09-17
• Paper number: 946
• Language: English
• Keywords: multivariate GARCH model; dynamic correlations; multiplicative decomposition of volatility; European sovereign debt crisis; financial contagion